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Are Cost Estimators Bad at Their Jobs?

San Francisco's Transbay Transit Center is just the latest example of an urban mega-project experiencing an enormous cost overrun. Eric Jaffe examines what the causes of this all too common phenomenon might be.

"So how did it get to the point where the only thing we can confidently expect from a big infrastructure project is that it will cost way more than expected?"

"One thing's for sure: the people who predict the cost of urban mega-projects do a terrible job," writes Jaffe. "Several years ago the University of Oxford scholar Bent Flyvbjerg, who's made a career researching mega-project mismanagement, analyzed 258 transportation infrastructure projects from around the world and found that nine in ten exceeded their cost estimates. The overruns were greater on rail projects than road projects but averaged 28 percent across the board."

"Whatever the underlying causes of cost overruns may be, there seems to be one promising means of addressing them: creating a 'reference class' of similar projects to serve as a platform for comparing costs. The idea, as explained by [psychologist Daniel] Kahneman in 2003 [PDF], is that old outcomes can serve as a barometer for recognizing just how unrealistic a biased new prediction might be — and help adjust it accordingly. Such a strategy controls for both political chicanery and cognitive biases alike."